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Tuesday, October 19, 2010

Super Angels

Fascinating essay from the must-read Paul Graham on how the emergence of a new class of investor—the super-angel—is changing the challenges and the rewards of funding startups. Money quote:

The fact that super-angels invest other people's money makes them doubly alarming to VCs. They don't just compete for startups; they also compete for investors. What super-angels really are is a new form of fast-moving, lightweight VC fund. And those of us in the technology world know what usually happens when something comes along that can be described in terms like that. Usually it's the replacement.

When an incumbent gets ossified and inflexible, and starts regularly failing its stakeholders, the conditions are ripe for a nimble new competitor to come along and eat their lunch. VCs in particular have had many years of awful performance for their limited partners. They have also been of increasingly limited help to an very tiny number of startups. Super-angels are poised between the angels and the VCs in the funding spectrum and offer investment amounts that better align a growing company's funding needs. The emergence of such a hybrid competitor is a welcome development to founders and early stage company executives. Super-angels will also force both angel investors and especially VCs to be better, and this can only help the future of innovation and its commercialization.